Are you a landlord looking to understand your obligations in commercial leases? Or, are you a tenant, looking to rent a commercial property for your business activities, but want to understand your rights and responsibilities? Either way, you've come to the right place.
Commercial buy-to-let contracts and leases are the backbone of relationships between landlords and tenants in the world of commercial property. These contracts lay out the rules, duties, and rights for both parties with precision.
Landlords and tenants must grasp these contracts' ins and outs to ensure clarity, adherence, and mutual gain.
In this article, we deep dive into the key parts of commercial buy-to-let contracts, giving you the essential knowledge to understand and work through these agreements confidently.
From lease terms to upkeep duties, and insurance needs to sorting out disagreements, we'll cover the important aspects and best practices for successful commercial buy-to-let contracts in today's rental and business market.
We cover:
What is a commercial buy to let contract?
What types of property fall under commercial buy to let?
What is the difference between commercial buy to let contracts and residential contracts?
What should be included in a commercial buy to let contract?
How is rent determined in a commercial buy to let contract?
What if rent is unpaid in a commercial buy to let contract?
What are my repair and maintenance responsibilities in a commercial buy to let contract?
What type of insurance do I need for a commercial buy to let property?
Who is responsible for insuring a commercial buy to let property?
Can I sublet or assign the lease as a commercial tenant?
How do I terminate a commercial buy to let contract?
Key laws and legislation in commercial buy to let contracts
How do I resolve a dispute in commercial buy to let contracts?
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What is a commercial buy to let contract?
A commercial buy-to-let contract is a legal agreement between a landlord and a tenant for the rental of commercial property.
Put simply, the landlord owns the property and leases it to a business or individual tenant for a set period in exchange for rent payments. The tenant would rent the property to carry out business activities, making them money and serving customers in some way.
What types of property fall under commercial buy to let?
Unlike residential buy-to-let contracts, which involve renting out properties for residential purposes, commercial buy-to-let contracts involve leasing properties for business or commercial activities.
These properties can include retail units, offices, warehouses, industrial spaces, leisure and hospitality properties (like restaurants, bars, cafes and hotels), commercial land, mixed use properties and specialised properties, such as medical clinics, gyms, educational institutions or entertainment venues.
What is the difference between commercial buy to let contracts and residential contracts?
Both commercial buy-to-let contracts and residential contracts involve leasing properties for monetary gain, however they differ significantly in terms of property type, tenant use, lease terms, regulatory framework, and maintenance responsibilities.
As we’ve mentioned, commercial buy-to-let contracts are used for properties intended for business or commercial activities, whereas residential contracts are for properties intended for living purposes, such as houses, apartments or flats.
It then goes without saying that tenants will use these properties for different things. Commercial tenants will conduct business activity and make money in their properties, however residential tenants will use their property to live, sleep, cook and take part in recreational activities in.
When it comes to the contracts, commercial buy-to-let contracts generally involve longer lease terms, ranging from 3-10 years or more. Within the agreement, there might be provision for rent reviews, and allowing periodic adjustments based on the market conditions. Residential contracts tend to range from only 6 months to 1 year.
And, what about maintenance and repair responsibilities? Commercial tenants have more responsibility for a larger range of maintenance tasks compared to residential tenants, including both the exterior and interior conditions of the property.
What should be included in a commercial buy to let contract?
A commercial buy-to-let contract should include provisions that protect the rights and interests of both the landlord and the tenant.
The important elements that you should include in a commercial buy-to-let contract are:
Identification of parties: Clearly identify the landlord (property owner) and the tenant (business or individual leasing the property).
Property description: Provide a detailed description of the leased premises, including the address, unit number (if applicable), and any specific features or amenities.
Lease term: Specify the duration of the lease, including the start date and end date, as well as any provisions for renewal or termination.
Rent payment terms: Outline the amount of rent to be paid, the frequency of payments (e.g., monthly, quarterly), and the acceptable methods of payment.
Repair and maintenance obligations: Clearly define the responsibilities of the landlord and the tenant for maintaining and repairing the leased premises, including structural repairs, utilities, and common areas.
Insurance requirements: Specify the types of insurance coverage required for the property, such as building insurance, liability insurance, and contents insurance, and clarify which party is responsible for obtaining and maintaining insurance policies.
Assignment and subletting: Include provisions addressing whether the tenant is permitted to sublet the premises or assign the lease to another party, and under what conditions such actions may be allowed.
Use clause: Define the permitted use of the leased premises, specifying the type of business activities allowed and any restrictions or prohibitions on certain uses.
Alterations and improvements: Clarify the procedures for making alterations or improvements to the leased premises, including obtaining necessary approvals from the landlord and local authorities.
Default and remedies: Outline the consequences of default by either party, including remedies available to the non-defaulting party, such as termination of the lease, eviction, or legal action for damages.
Dispute resolution mechanism: Include provisions for resolving disputes between the landlord and the tenant, specifying whether disputes will be subject to mediation, arbitration, or litigation.
You should also address any additional terms or conditions deemed necessary, such as access rights, parking arrangements, signage restrictions, or confidentiality clauses.
How is rent determined in a commercial buy to let contract?
In a commercial buy-to-let contract, rent is more complicated than in residential leases and involves a lot of negotiation between the landlord and the tenant.
First of all, the prevailing market conditions for similar commercial properties in the area will significantly influence how the rent is worked out. Landlords should carry out market research or get the help of property agents to assess comparable rental rates.
Of course, the size, location, and condition of the commercial property plays a significant role here too. Properties in prime locations where there is high foot traffic or desirable amenities will normally command higher rents, so this is worth noting.
Different types of commercial properties command different rental rates too. Retail spaces, for example, may have higher rental values compared to industrial or office spaces due to their potential for generating more money for the business.
As well as this, the length of the lease term and any provisions for rent escalation or rent reviews over the lease term can affect rent. Longer lease terms or rent escalation clauses may provide landlords with greater rent stability and potential to increase it over time.
If they’re feeling generous, landlords may offer tenant improvements or incentives, such as rent-free periods or contribution to fit-out costs, which can impact the overall rental rate negotiated.
In some commercial leases, tenants may be responsible for paying a proportionate share of operating expenses and service charges associated with the property, in addition to base rent. These additional charges can affect the total rent payable by the tenant.
Ultimately, rent determination in a commercial buy-to-let contract is subject to negotiation between the landlord and the tenant and you need to look to achieve a mutually acceptable rental rate that reflects the value of the property and the terms of the lease agreement.
What if rent is unpaid in a commercial buy to let contract?
Landlords can issue a late payment reminder to the tenant, reminding them of the overdue rent and requesting payment as soon as possible. This communication serves as a formal notice to the tenant of their obligation to pay rent on time.
If the rent remains unpaid after the due date, landlords can then issue a formal notice to the tenant, commonly known as a rent demand or rent arrears letter. This notice typically specifies the amount of rent owed, the date by which payment must be made, and the consequences of continued non-payment.
Under the Commercial Rent Arrears Recovery (CRAR) regulations, landlords can use CRAR to recover unpaid rent from commercial tenants. CRAR allows landlords to instruct enforcement agents to seize the tenant's goods or assets to recover the outstanding rent. However, CRAR can only be used if certain conditions are met, including giving the tenant at least 7 days notice before taking action.
If attempts to recover unpaid rent through informal means are unsuccessful, landlords can take legal action against the tenant for rent arrears. They will start court proceedings to get a judgment for the outstanding rent, followed by enforcement actions such as obtaining a warrant for possession or instructing bailiffs to seize assets.
Of course, persistent non-payment of rent may be seen as a breach of the lease agreement, giving landlords the power to end the lease and take back possession of the property. Landlords must follow the procedures outlined in the lease agreement and comply with statutory requirements for terminating commercial leases.
In some cases, landlords and tenants may look to reach a settlement to resolve rent arrears amicably. This could involve agreeing on a repayment plan, rent reduction, or other concessions to address the tenant's financial difficulties while ensuring the landlord's interests are protected.
What are my repair and maintenance responsibilities in a commercial buy to let contract?
In a commercial buy-to-let contract, repair and maintenance responsibilities are normally negotiated between the landlord and the tenant and outlined within the lease agreement.
However, there are certain aspects of repair and maintenance that are generally attached to either the landlord or tenant.
Landlords in general are responsible for maintaining the structural integrity of the building, including the roof, walls, foundation, and structural elements.They also bear the responsibility for the exterior of the building, such as painting, repairs to the facade, and upkeep of common areas (e.g., parking lots, sidewalks).
Landlords may be responsible for maintaining shared or common areas within the property, such as hallways, stairwells, elevators, and landscaping and they will usually maintain and repair major building systems, including heating, ventilation, air conditioning (HVAC), plumbing, electrical, and fire safety systems.
Importantly, landlords are responsible for making sure that the property complies with relevant building codes and regulations.
On the other side of things, tenants are generally responsible for maintaining the interior of the leased property, including repairs to fixtures, fittings, and interior walls. They take responsibility for routine maintenance and day-to-day tasks such as cleaning, janitorial services, and minor repairs associated with their business operations.
In addition, tenants will normally pay for utilities such as electricity, gas, water, and sewer charges, unless otherwise specified in the lease agreement.
It is worth noting that tenants must meet the repair and maintenance obligations set out in the lease agreement, including reporting any maintenance issues to the landlord as soon as possible.